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Balance Sheets: The Good, the Bad and the In-Between

08/01/07 - 01:51 PM EDT

Scott Rothbort

Rather than pick one of those four balance sheets, I will discuss many of the problems that plague all or some of these companies, including:

  • Negative or deficit retained earnings
  • Negative equity
  • Negative net tangible assets
  • Low current ratio

Negative or deficit retained earnings: Retained earnings represent the cumulative net income of a company. When a company has a negative retained earnings balance, it says to the world that it has generated accounting losses over a prolonged period of time. Here are the retained earnings, in millions, for Six Flags, Level 3, Sirius and XM -- taken directly from the most recently available quarterly (first quarter of 2007) balance sheets:

  • Six Flags: -$1,560.20
  • Level 3: -$9,586.00
  • Sirius: -$3,978.47
  • XM: -$3,620.91
(Source: TheStreet.com Quotes Section)

Negative equity: When the deficit in retained earnings surpasses the amount of capital that the company has, this is a red flag that signals that the company is in distress.

When a company is in distress, it has two options. Option one is to recapitalize its balance sheet by issuing additional capital (selling common or preferred stock). If that's not possible, then the other option is to file for bankruptcy.

Two of the companies I pointed out earlier -- satellite radio twins Sirius and XM -- have negative equity. Those companies chose to merge. Whether or not that merger occurs, I think that in the long run, one of them, both or a combined company may see its destiny in Federal Bankruptcy Court.

At the time of publication, Rothbort was long AAPL, BA, GOOG, MA, MCD, RL and SHLD, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.


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